The Guidewire acquisition of First Best should come as a wakeup call to other suite vendors in the marketplace. Not to be a doomsayer, but the reality is the market for core system replacements is shrinking. Many carriers are in the middle of a replacement or have already completed their replacement. There are fewer and fewer deals to be had and more and more vendors in the marketplace chasing those deals.
Let’s look at the numbers. Donald Light’s recent PAS Deal Trends report shows that we’ve seen an average of around 85 deals a year over the last two years. But there are more than 60 suite vendors out there. Of those available deals, a very few key vendors – including Guidewire – will likely get half or more of them. That leaves around 40 deals for the remaining 60’ish vendors. That’s less than one each. And that’s IF we assume the market will stay steady at 80-85 deals a year. This basic math shows that many core suite vendors will not get a single deal in 2017.
So how can vendors satisfy their shareholders? How can they generate growth and remain viable players? The truth is some of them won’t. But smart vendors are thinking about other options for growth. And they have a few paths they can take.
- Sell things other than suites. This is the tactic that Guidewire is showing with their recent announcement of the FirstBest acquisition and is also illustrated by their prior acquisitions of Millbrook and Eagle Eye. Duck Creek is doing the same as shown by their acquisition of Agencyport. Providing other core applications that carriers need allows a vendor to continue to grow their existing relationships, and allows them to create new relationships with carriers – even if the carrier doesn’t need a new core system. Some vendors will purchase these additional applications; others will build them.
- Sell to a different market – Insurity’s acquisition of Tropics lets them go down market to work with small WC carriers. Their acquisition of Oceanwide gives them the ability to handle small specialty, or Greenfield projects. While there are still plenty of deals to be done in the under $100M carrier market, most vendors can’t play in this space. Their price points won’t work for small carriers, and their implementation process won’t work. It’s too expensive and takes too many carrier resources. The implementation process has to be drastically different for a carrier with only 6 people in the IT department than it is for a larger carrier. This strategy of going down market only works if a vendor can appropriately sell and deliver their solution to a small carrier while still making margin – and many vendors just can’t do that.
- Enter a different territory – Vue announced today they’ve entered Asia with Aviva; Sapiens entered the US by purchasing MaxProcessing. And we see other vendors including Guidewire, EIS, and Duck Creek moving outside the US.
- Sell services – many vendors provide cloud offerings – which provides a steadier stream of income. Vendors such as CSC or The Innovation Group (prior to the split) had/have a large proportion of revenue coming from services. Vendors like ISCS provide additional BPO services such as mail services and imaging.
Any of these strategies are viable – but I predict we’ll see more vendors using them as the market for core system replacements shrinks. Smart vendors are already thinking ahead, working on their long term strategy.
Carriers who work with these vendors should be watching as well. No one wants to work with a vendor that won't be here for the long term. If you’re a carrier considering a new system –
- Make sure your vendor is showing momentum – new sales.
- Look to see what the signals are for their long term viability – will they be a survivor selling new suites?
- Do they have the resources to create or acquire new capabilities like portals, analytics or distribution management?
- Are they entering new markets, new territories or providing new service offerings?
If you don’t see these signals, you may want to start having a conversation with your vendors today.
Today’s announcement of Apax Partners’ acquisition of Agencyport makes sense. This deal is a further commitment by Apax to the property/casualty software sector—following shortly after Apax’s announcement of its equity investment in the soon to be independent Duck Creek.
Insurers want the internal and external users of their systems to have seamless mobile access to new business and other functionality. Agencyport has developed one of the leading solutions for agents, brokers, and policyholders find information and execute transactions with insurers’ core systems.
As is true for any technology acquisition, the soon to be combined management teams of Agencyport and Duck Creek will need to focus on communicating the benefits of their new relationship to current and prospective customers—sending a “good before, better now” message. Providing “vendor neutral” support to Agencyport customers who do not use Duck Creek solutions and Duck Creek customer who do not use AgencyPort solutions will also be crucial.
- Software integrators-driven acquisitions: large software integrators are trying to diversify their service offering through the acquisition of insurance system IP. The best example of this type of strategic move is for instance the acquisition of Wyde by MphasiS a few years ago.
- The Private Equity (PE) firms-driven acquisitions: there is a growing interest to invest in the insurance core system space for PE firms. The best examples of this type of acquisitions are the contribution of Riverside in the merger between Charles Taylor and Fadata or Waterland Private Equity investment in Keylane that now combines activities of various PAS vendors including formerly branded LeanApps, Quinity, Mantcore and more recently the German vendor called Geneva-ID.
- The core system vendor-driven acquisitions: PAS vendors understand they can grow quicker if they merge with a competitor. Sapiens acquisition of FIS Software and IDIT or Prima Solutions acquisition of Albiran a few years ago are good examples.